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After IDFC Mutual Fund has decided to exit the fund business, even if partially, Reliance Mutual is actively scouting for a strategic investor. Several others are in the queue
Reliance Capital, which had sold 5% of its stake in Reliance Capital Asset Management to Eton Park in what has been the highest-ever valuation for a mutual fund's assets, is now looking to sell a bigger chunk of its equity in what it terms as a strategic alliance. This comes close on the heels of the Moneylife article last Friday (see: http://www.moneylife.in/article/8/6228.html) that IDFC Mutual Fund was exiting the fund business. IDFC officials attempted to deny it orally (no official denial has come so far) but on Monday, a senior official has been quoted in a business paper that it is looking for a strategic alliance. In fact, according to reliable sources, IDFC officials are actively pursing discussions regarding valuation of the fund management business which manages almost Rs27,000 crore in assets.
In October last year, Cholamandalam exited the mutual fund business by selling its stake to L&T Finance, an associate of engineering giant Larsen & Toubro.
According to our sources, sponsors of at least 10 asset management companies (AMCs) are mulling whether to continue in this business. This includes later entrants, especially those started by broking houses which have a very low tolerance for losses and low patience for long-term investment.
In December 2007, at the height of the global bull market, Eton Park had paid Rs500 crore for its 5% stake in Reliance Asset Management, which valued the mutual fund business of Reliance at a mind-boggling 13% of assets under management. Reliance will get much lower valuation for its stake now.
Eton Park is a hedge fund founded by former Goldman Sachs Group partner Eric Mindich. At the time Eton Park acquired the stake, Mr Mindich had said: "We share Reliance Capital's excitement on the growth prospects of the industry." But soon after Eton Park bought the stake, the global markets went through huge turmoil, bringing the world to the brink of the 1930s style Depression. While the world has recovered from that crisis and the Indian economy has done exceptionally well, the Indian fund businesses have suffered a series of blows, including frequent and stricter regulations, most notably the abolition of entry load and tighter rules for paying commissions to distributors. In January this year, T Rowe Price acquired a 26% stake in UTI Asset Management for $142.4 million (Rs650 crore), or just 3.2% of assets under management (around Rs79,000 crore) at that time. L&T took over the loss-making Cholamandalam AMC for just 1.5% of assets under management.
This shows that while the sponsors may be wanting to exit based on certain expectations of sunk costs, there is bound to be huge disparity in valuation depending on the size of the fund. Simply put, smaller funds would have to take a loss to get out of the business.